Mistrust and narrow conceptions of short-term national interests are undermining the global cooperation necessary to repair the damage of the financial crisis and build the safe and efficient financial sector that we need going forward. Increasingly interconnected national economies need financial institutions and markets that efficiently cross borders as well. Further, the many links that already exist in global finance require cooperation on financial regulations to avoid a race to the bottom or dangerous gaps that encourage risky behavior.
The terrible global financial crisis of 2007-9, and the ensuing “Great Recession,” concentrated the minds of national leaders on the need for cooperation. Several G-20 summits of the leaders of the world’s big economic powers focused on setting global rules, in particular by mandating that the Basel Committee on Banking Supervision and the Financial Stability Board build new and improved global rulebooks. Recognizing the need for reform, and knowing that the most powerful leaders in the world were watching, these international organizations moved swiftly to reach agreement, despite the daunting complexity of the task. In particular, the Basel Committee designed the “Basel III” rules to ensure that major banks have enough capital and liquidity to operate safely. These rules are big improvements on the earlier Basel and Basel II accords that had governed banks in the run-up to the financial crisis.
Unfortunately, mistrust and narrow national fears are eroding cooperation. The Basel Committee is increasingly divided into two camps, each suspicious of the other. The US, the UK, and some others are pushing hard to ensure that short-term concerns do not lead the standards to be whittled down too far. Germany, France, Japan and their allies appear more concerned about avoiding any actions that will make life much harder for their banks in the midst of the Euro Crisis and Japan’s continuing stagnation. Within these camps, most countries are also maneuvering to protect their own particular national interests, often conceived in a narrow and short-term way. No country has a monopoly of virtue here and there are genuine issues about how to balance long-term and short-term goals while also accommodating true differences in national economic and financial structures. It’s time to step back from the antagonism and mistrust and work harder to find a common ground that will get us through the short-term while building a better global financial system that will aid all of us.
The same problems of creeping mistrust are evident in Europe as well. Back in the summer, European leaders took a bold and necessary step forward by agreeing to build a true “banking union” across Europe, or at least the Eurozone. They did this in part because integrated supervision and support for banks was long overdue, given the amount of cross-border banking that already occurs in Europe. Mostly, though, they did it because the financial markets had concluded that using national guarantees for national banking systems in Europe was pouring fuel on the fire of the Euro Crisis. Spain was the example du jour. The need for the Spanish government to rescue its banking system made the government’s debt load higher and more burdensome. Meanwhile, the plummeting value of existing Spanish debt, and the rising interest rates on new borrowings, were inflicting severe damage on the banks, leading to a vicious circle. Bringing banks together across Europe into a system with Europe-wide safety nets would break this link. Keeping the new system safe also calls for Europe-wide oversight of the banks, to ensure that lax supervision in a troubled country does not unfairly cost taxpayers across Europe.
So far, so good. However, fear about the Euro Crisis has diminished. As a result, true banking union is being delayed, watered down, and splintered, at least in comparison with the original grand statements. The bold, high-level promises were always going to be constrained by the realities of implementation, but this has gone further than I had hoped. In particular, Germany and the other fiscally strong Eurozone nations are dragging their feet about anything that might cost money, especially in the run-up to this fall’s German elections.
At this point, a pessimistic reading is that the part of the banking union proposal that was supposed to break the link between the safety of governments and the safety of their banks will not happen for at least a couple of years and may not truly ever be implemented fully. Even the “easy” part, agreeing on overall supervision of Eurozone banks by the European Central Bank, is at risk of meaning considerably less than it should, at least for a few more years. Giving the ECB the ultimate supervisory power can mean a lot of different things and Germany and some others are pushing to weaken the ECB’s mandate, at least in practice. Germany wants to protect its politically connected system of savings banks and cooperative banks from real European oversight.
In Europe, and in the wider world, it is critical that leaders recognize that the gains from cross-border cooperation in finance are large and the risks from playing games to protect narrow national interests are also big. It’s time to get serious again, across the board. Complacency is dangerous with the job of reform still so far from finished.